how huge food companies like Cargill and Mcdonald’s, etc. protect themselves from extreme price changes.
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Former purchaser for a large CPG (consumer package goods) company with brands most would know. $200m in spend under management.
You’re asking two different questions. Cargill is mostly B2B and and McDonald’s is B2C.
For commodity items with a ticker/index. Costs can be “controlled” by hedging positions with options/futures etc. This is way out of my wheelhouse. And judging by the comments, out of most peoples wheelhouse trying to explain it.
For the items you find in the grocery store, most have ingredients going into them that have contracts in place ranging from quarterly to 2 or 3 years. However most contracts typically have a 1 year pricing structure.
Markets are always fluctuating and there are levers to pull to control costs. Some commodities are falling while others are increasing. You can move suppliers to increase competition and drive prices down.
But in times like covid created, it seemed all markets were going up so you didn’t have the luxury of one market falling to offset the inflation of another ingredient. This is when the general population felt it the most
I can’t speak to the fast food world either but CPG brands do a lot to attempt to control costs and major retailers tend to push back pretty hard on pricing increases. Even in “creative ways” like reducing the serving size. This is all vetted and negotiated, those in sales and marketing for a CPG brand have analytical teams that break down price/pack architecture. Which is just a fancy way of saying cost per unit of measure. And they compare across the competitive landscape. Like a 12pk of coke vs Pepsi vs Dr Pepper. So if one of these guys tries to pass along a price increase to Walmart and cites the reason is the cost of sugar is up, that has to jive with the story the others are selling. Or you simply price yourself out of the market.
There are plenty of nuances to this. I attempted to be as brief as I could be for such a complex topic.
There is a concept in commodity trading called futures. I won’t get into the technical details but it basically a contract that says “I will buy x product from you at y date for z amount of money”
Large companies buy alot of theses contracts. Imagine if maccas one day ran out of potatoes for chips? Imagine the reputation damage and lost money. So they buy contracts to guarantee supply.
But let’s say potatoe when up 500%. It won’t effect maccas because they have a signed contract saying the farmer will sell at z amount of money. They have to sell to them at that cost. Anything they make above that then they can sell at market rates but not untill they filled there contract first.
What’s in it for the farmer? The certainity there product will be sold at a specific cost. Imagine the cost of potatoes went down 90% and u were a potatoe farmer. U could lose your farm with such a drop. But u entered into a contract with maccas so u are guaranteed the sale at the agreed upon rate. So u don’t have to worry about a lost
As an example. Do u remember during covid when the price of oil went into negatives. This was in part due to these contracts. The interesting thing is people buy and sell these contracts but when the contract ends, whoever hold the contract has to buy the product at that cost. At the time, there was not enough space to hold the oil so people were desperately trying to sell the contract so they didn’t have to pay for it and find a place to store it. It got so bad people were willing to pay you to take it off them. But it didn’t reflect at the pumps because there are fixes cost to transportation of petrol.
However this is only from a pure market perspective. There are many aspect like bulk purchasing and other factors that allow them to be less price sensitive.
One other aspect people haven’t touched on here is that highly processed foods are often not one single recipe, but a family of variations that can be used to get the same taste/texture/stability/price/whatever in the end result with somewhat different ingredients, depending on market conditions.
It’s not unlike a home baker who knows what the dough’s consistency is supposed to be like, and can add just enough water for that day’s humidity and room temperature to get that consistency even if it’s not the same amount of water as what they used yesterday.
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